Having a clear financial plan comes before investing. It lays a strong foundation for your investment and can help answer many financial questions, some of which may have kept you up at night.
An investment is just one element of your financial plan.
The financial plan is like a roadmap, which identifies different routes to reach your desired destination, for example, when you can retire and identify potential obstacles.
It starts with capturing your hopes, dreams and fears and putting a plan to address them. You can see if you are on track to achieve the goals you have set out.
If you don’t like what you see, the financial plan can show you how to improve your position.
Imagine you’re planning the trip of a lifetime—a journey around the world with the money you have. You don’t know how long it will take to complete the trip or how much it will cost.
The key question is: do you have enough money to complete the journey?
The answer will depend on the expected cost of your trip. Do you wish to travel in luxury, go backpacking, or something in between? Do you expect to earn some extra cash while travelling?
What if things don’t go as planned (e.g. your vehicle breaks down or you fall ill)? If you plan to travel in business class, will you have to switch to economy class?
Now substitute “trip around the world” with “personal life journey”. We have one life.
We can correct the course we take, but we can’t do it all over again. We can react as things happen, but we are much better off being proactive in the long run.
Preparing is often better (and cheaper) than repairing. As US President Eisenhower once said, “Plans are worthless, but planning is everything”. Your plan will change as your life changes.
Your financial plan can also help answer many investment-related questions:
How much do you need to save and invest for your short, medium and long-term goals?
Can you retire now given the level of your accumulated wealth and sources of income? If not, when can you retire?
What level of returns would your investment need to earn for your plan to be achievable? Is it realistic?
How much risk do you need to take? How much risk can you emotionally tolerate?
Can you afford to invest? Have you built your portfolio of investments on strong foundations? Do you have a sufficient cash buffer? Have you insured the risks in case you were to die or not be able to work?
Can you afford not to invest, considering inflation and increasing life expectancies?
How much income can you safely draw from your investments so that your money lasts as long as you last?
Will you need to reduce your spending and draw less income from your investment portfolio during market downturns and economic slowdowns?
Can you afford to spend more perhaps and live life to the full?
Will you remain financially secure if you pay for your children’s (or grandchildren’s) university fees, or help your children with a house deposit?
The list could go on. Without understanding your life goals and personal financial position, it is very difficult, if not impossible, to answer many investment-related questions.
Should you invest? Should you focus instead on repaying your debts? How much should you invest? How much risk should you take?
We also don’t know what we don’t know. Using a Chartered Financial Planner can help you identify your unknown unknowns – we all have them! Planning can also help minimise future regrets.
We cannot fully control or predict the returns our investment portfolios will earn. Neither can we predict with certainty what life will throw at us.
However, it is empowering to know that we can control many aspects of our financial plans.
Our work as financial planners is to help you focus on what you can control, assist you in finding clarity about your goals and give you more confidence about your future.